Warren Buffett, the renowned value investor, is currently sitting on an astonishing cash pile. Berkshire Hathaway, his conglomerate, holds more than $325 billion in cash and equivalents as per the firm's quarterly financial statements, with a significant portion in U.S. Treasury bills. Everyone is curious about the reason behind this. Is he cashing out due to an unstable market priced too high? Are there no suitable investment opportunities? Or is he making way for a successor?
Unraveling Warren Buffett's Cash Conundrum
Market Hotness and Buffett's Approach
The stock market is on a remarkable upswing. The S&P 500 has surpassed the 6,000 mark, making this one of the best-performing years since 2000. Corporate valuations are soaring, and profits are following suit. Nvidia, for instance, has crushed expectations by doubling its profits with revenues surging on the back of artificial intelligence. However, Buffett has always been a value investor, seeking undervalued companies with long-term potential. He once stated that he doesn't invest in things he doesn't understand, like technology companies except for Apple. Although a part of his mounting cash reserve comes from selling shares of Apple.Cathy Seifert, a director at CFRA Research, explained that "Apple was becoming an outsized part of the portfolio," so the offloading "made sense." Berkshire was late to the tech game but had a decent run with Apple. On the other hand, Meyer Shields, a managing director at Keefe, Bruyette & Woods, believed the firm might have considered Apple "fairly valued or maybe more than fairly valued.""Buffett has succeeded over the decades by being consistent in his approach," he said.Berkshire's Recent Stock Purchases
Despite the large cash pile, Berkshire did make some stock purchases. They bought Domino's Pizza, a favorite pizza franchise, and Pool Corporation, a swimming pool supplies company. At the end of the third quarter, Berkshire's stake in Domino's was valued at around $549 million, and the Pool stake was valued at about $152 million according to Yahoo Finance. Buffett has always favored junk-food stocks, and these purchases fit that pattern.Stock Market Reactions and Berkshire's Stance
Overall, the stock market has reacted positively to Donald Trump's win and the prospect of another presidency. However, Berkshire doesn't seem to be participating actively. Seifert explained that the firm doesn't see the post-election rally as sustainable, citing Trump's inflationary policies. She also believes Berkshire's overall financial results in the last quarter were weak, so they are cautiously looking at their own financials and market valuations.Greg Abel has been named to succeed Buffett at Berkshire Hathaway. Seifert doesn't think the cash hoarding is necessarily for succession planning. Instead, it reflects a fundamental skepticism about the sustainability of current market valuations and the Trump trade, along with the fact that they haven't found many appealing acquisition targets.Berkshire doesn't pay a dividend except for one notable exception in 1967, so cash accumulates over time. One of its methods of using the cash, buying back its stock, isn't being utilized. This brings us back to succession planning."The unfortunate actuarial reality is that at some point, there will be a change in senior management. I suspect they want to have a lot of cash to buy back Berkshire Hathaway stock," Shields said.He continued, "When that happens, we expect the stock to sell off as Warren Buffett is no longer there. Many people own Berkshire Hathaway because of him. They want to have enough cash available to benefit shareholders during such a sell-off."Buffett doesn't jump into the latest investment craze. In the past, this approach has worked well for Berkshire. Despite the large cash pile, the return on it is also rising as it makes money just sitting there.